Research and Development Specifics

Toray’s Composite Materials Research Laboratory (CMRL), a 15,000-square-foot facility located in Tacoma, conducts pioneering research and development on matrix resins and carbon fibers for commercial aviation, military drones, and space launch vehicles. The CMRL is equipped with a pilot prepregging line, thermo-analysis equipment, chemical and physical analysis tools, and advanced microscopy capabilities. Recent technological advancements originating from this facility include the development of Out-of-Autoclave (OOA) epoxies, high-temperature cyanates for space rovers, and the T1100G next-generation carbon fiber, which provides unprecedented strength-to-stiffness ratios for military and commercial applications.

Federal and State R&D Tax Eligibility

Toray’s materials engineering efforts exemplify the quintessential application of the federal R&D tax credit’s four-part test under Internal Revenue Code (IRC) Section 41.

The research is undertaken for a permitted purpose, specifically the development of a new or improved business component, such as the T1100G carbon fiber matrix, which fundamentally improves mechanical strength, impact resistance, and durability under extreme aerospace stress. The activities are inherently technological in nature, relying entirely on the principles of polymer chemistry, nanotechnology, and chemical engineering. Prior to the commencement of testing, there exists objective technological uncertainty regarding the capability or method of achieving the desired outcome, such as determining whether a low-temperature cure system can maintain a high glass transition temperature without succumbing to catastrophic water absorption. To eliminate this uncertainty, Toray engages in a systematic process of experimentation, utilizing its pilot prepregging line and thermo-analysis equipment to iteratively test resin formulations against extreme environmental variables, analyzing the data, and refining the chemical structures.

Under federal law, Toray can treat these domestic research and experimental (R&E) expenditures favorably. With the passage of the One Big Beautiful Bill Act (OBBBA) of 2025, which added IRC Section 174A, Toray can elect to fully expense these domestic R&E expenditures in the year they are incurred, reversing the punitive five-year amortization mandate previously established by the Tax Cuts and Jobs Act (TCJA).

At the state level, Toray qualifies for Washington’s highly lucrative Aerospace Preproduction Development B&O tax credit, which equals 1.5% of qualified preproduction development expenditures. This is available to both manufacturers and non-manufacturers engaged in aerospace product design. Concurrently, the firm benefits from a preferential B&O tax rate of 0.9% for aerospace product development. To maintain compliance, the firm must electronically file an Annual Tax Performance Report with the Washington Department of Revenue (DOR) by May 31 of the year following the claim. Furthermore, under the landmark Washington State Board of Tax Appeals decision in Terrapower LLC v. Dep’t of Revenue (2022), the advanced microscopy and chemical analysis equipment purchased for the Tacoma CMRL is fully exempt from Washington sales and use tax under the Machinery and Equipment (M&E) exemption, even if the laboratory does not manufacture items for commercial sale.

Research and Development Specifics

Infoblox specializes in the development of advanced Domain Name System (DNS), Dynamic Host Configuration Protocol (DHCP), and IP address management (collectively known as DDI) software. The Tacoma Center of Excellence focuses heavily on predictive threat protection and cloud-native network modernization. In a formal partnership with UW Tacoma researchers, Infoblox engineers utilize big data analytics and cutting-edge machine learning methodologies to mitigate DNS vulnerabilities, preempt ransomware attacks, and secure hybrid-cloud environments against external threat actors.

Federal and State R&D Tax Eligibility

Developing predictive DNS-based threat protection algorithms requires rigorous software engineering that satisfies the federal IRC Section 41 parameters. The permitted purpose of the research is to improve the performance, reliability, and security functionality of commercial software components. The work is inherently technological in nature, relying on the principles of computer science, informatics, and discrete mathematics. The research seeks to eliminate objective technological uncertainty regarding the algorithm’s capability to process massive volumes of hybrid-cloud network telemetry in real-time without producing false positive threat detections or unacceptable network latency. To resolve this uncertainty, Infoblox engineers engage in a process of experimentation involving iterative coding, regression testing, algorithmic tuning, and machine learning model training utilizing real-world cyber threat data sets.

Because software development is subject to specialized IRS scrutiny, Infoblox must navigate the IRS’s Audit Guidelines for Software Development. If software is developed primarily for the taxpayer’s internal use (Internal Use Software, or IUS), it must pass an additional “high threshold of innovation” test, requiring the taxpayer to prove the software results in a reduction in cost or improvement in speed that is substantial and economically significant. However, because Infoblox develops commercial-facing cybersecurity products intended for external enterprise deployment, the software escapes the stringent IUS limitations, lowering the barrier to claiming the federal credit.

At the local level, Infoblox’s strategic expansion in Tacoma triggers substantial municipal and state incentives. The firm scaled its local presence from 45 employees to over 225. By locating its operations within a designated Tacoma Community Empowerment Zone (CEZ), Infoblox is eligible for the City of Tacoma B&O Job Credit. This municipal program provides a $500 B&O tax credit annually for five years for each new full-time position paying a family wage. This credit can increase to $1,000 annually if the employee meets federal Work Opportunity Tax Credit (WOTC) criteria, with an additional $250 annual bonus awarded because the business performs international computer services within the CEZ. Furthermore, as a computer-related service business expanding its full-time equivalent (FTE) employment by over 15%, Infoblox qualifies for the Washington State CEZ B&O credit, which provides up to $4,000 per new employee earning over $40,000 annually, provided the positions are maintained for twelve consecutive months.

Research and Development Specifics

The MultiCare Institute for Research and Innovation (MIRI), headquartered in Tacoma, conducts highly complex clinical trials and oncological research. MultiCare researchers actively investigate predictive biomarkers to foresee severe pregnancy complications such as preeclampsia, operate phase III randomized clinical trials for metastatic squamous non-small cell lung cancer, and deploy advanced robotics and drone delivery technology in clinical settings. Through partnerships with entities like Mirvie and the establishment of the MultiCare Cancer Institute, the organization leads the Pacific Northwest in translational medicine and patient-centric experimental therapies.

Federal and State R&D Tax Eligibility

Medical research and clinical trials inherently involve the rigorous scientific methodology required by the IRC Section 41 four-part test. The permitted purpose is the development of new medical treatment protocols, diagnostic processes, or the improvement of pharmaceutical efficacy. The research is fundamentally technological in nature, rooted entirely in the biological sciences, medicine, and biochemistry. Clinical trials seek to eliminate profound technological and scientific uncertainty regarding the safety, optimal dosing, and therapeutic efficacy of experimental treatments—such as the administration of rilvegostomig or pembrolizumab—on human subjects presenting with specific pathologies. The process of experimentation is formalized through Phase III randomized controlled studies, utilizing double-blind methodologies, systematic hypothesis testing, and rigorous patient data analysis to validate outcomes.

To successfully claim the federal R&D tax credit, clinical research organizations like MultiCare must carefully structure their funding agreements to avoid the “Funded Research” exclusion under IRC Section 41(d)(4)(H). As articulated by the United States Tax Court in Smith v. Commissioner, if a pharmaceutical sponsor entirely funds a clinical trial and the taxpayer (the hospital or research institute) retains no substantial rights to the resulting research data, or if payment is not contingent on the success of the research, the R&D costs cannot be claimed by the taxpayer. However, if the research is funded through specific competitive grants where the institution retains publication and patent rights, or if the organization internally funds research on predictive biomarkers, the credit remains applicable.

Furthermore, under the Terrapower administrative precedent, MultiCare’s acquisition of sophisticated laboratory equipment for biomarker testing and clinical diagnostics is legally exempt from Washington sales and use tax under the state’s M&E exemption. This significantly lowers the capital expenditure required to conduct cutting-edge medical innovation within the state.

Research and Development Specifics

To facilitate this modernization, the Tacoma Maritime Blue Incubator and the EDGE Cluster partnered with the 5G Open Innovation Lab to launch the Tacoma Blue Edge Network. This infrastructure represents one of the world’s first private, enterprise-ready 5G cellular networks deployed directly within a working maritime port. This unique telecommunications infrastructure allows maritime startups and established logistics firms to research and develop digital transformation technologies, zero-emission foil fast ferries, and clean hydrogen shore power systems within a live, high-interference industrial environment.

Federal and State R&D Tax Eligibility

The integration of 5G telemetry into heavy marine logistics represents a classic telecommunications and engineering R&D effort that aligns with the federal four-part test. The permitted purpose involves developing new operational processes for real-time vessel tracking, just-in-time arrival systems, and autonomous port operations. The activity is technological in nature, relying extensively on electrical engineering, computer science, and radio frequency (RF) physics. The engineering teams must eliminate uncertainty regarding whether a 5G signal can maintain continuous ultra-low latency data transmission through the severe metallic interference generated by stacked shipping containers and moving heavy gantry cranes. The process of experimentation involves field-testing edge computing nodes, altering antenna arrays, adjusting frequency modulations, and analyzing data packet loss under variable marine weather conditions.

At the federal level, the capital and labor costs associated with designing, deploying, and testing this 5G architecture are eligible for the R&D tax credit. Additionally, under the newly enacted OBBBA, these domestic costs can be subject to immediate expensing under IRC Section 174A, vastly improving the cash flow of participating technology startups.

At the state level, the hardware and implementation of marine electrification technologies—such as electric marine propulsion systems with continuous power greater than 15 kW and shoreside battery charging infrastructure designed to reduce grid demand—are entirely exempt from Washington retail sales and use tax through July 1, 2030. Furthermore, major capital investments exceeding $2 million in clean technology manufacturing, including zero-emission commercial maritime vessels, can receive a 100% sales tax deferral and subsequent reduction if the project developers meet specific community workforce agreements and labor standards.

Research and Development Specifics

Today, APA represents manufacturers across North America and operates a 42,000-square-foot, state-of-the-art research center at its corporate headquarters in Tacoma. The facility contains a 4-foot-thick reinforced strong floor, ten strong wall blocks with anchors, and twin 5-ton cranes utilized to conduct massive full-scale destructive testing of glued-laminated (glulam) timber, cross-laminated timber (CLT), oriented strand board (OSB), and structural composite lumber. The association’s engineers conduct complex 3D assembly tests to characterize the seismic, wind, and structural performance of engineered wood buildings, as well as hygrothermal modeling to analyze wall drying and moisture performance in varied climates.

Federal and State R&D Tax Eligibility

The structural testing of engineered wood products fits seamlessly within the parameters of qualified research under IRC Section 41. The permitted purpose is to improve the reliability, load-bearing capability, and fire-retardant qualities of structural composite lumber and glulam beams. The research is strictly technological in nature, adhering to the rigorous principles of mechanical engineering, materials science, and physics. The primary goal is to eliminate uncertainty regarding the precise ultimate load capacity, shear strength, and long-term hygrothermal modeling of new adhesive compounds subjected to sustained environmental stress. The process of experimentation involves utilizing hydraulic actuators to apply calculated loads to structural assemblies until catastrophic failure occurs, analyzing the resulting stress-strain curves, and adjusting the wood lamination and adhesive techniques in subsequent iterations.

Because APA operates as a 501(c)(6) nonprofit trade association, it possesses a unique tax profile. Member manufacturing companies that fund APA’s applied research can claim their financial contributions toward their own federal R&D tax credits under the specialized “qualified research consortium” rules outlined in IRC Section 41(b)(3)(C). This statutory provision allows for 75% of the amounts paid or incurred by a taxpayer to an eligible consortium to be treated as qualified research expenses.

At the state level, APA’s Tacoma laboratory is the textbook beneficiary of the administrative precedent set by the Terrapower legal decision. Because APA utilizes its hydraulic presses, environmental chambers, and heavy cranes exclusively for applied research and development—and does not manufacture commercial wood panels for retail sale—the multi-million dollar capital equipment remains wholly exempt from Washington state retail sales and use tax under the broadened interpretation of the M&E exemption.

Even if an activity meets the four-part test, it may still be expressly excluded from the definition of qualified research under the statutory exclusions of IRC Section 41(d)(4).

In response to this economic friction, the recently enacted One Big Beautiful Bill Act (OBBBA) of 2025—which absorbed many provisions from the earlier proposed Tax Relief for American Families and Workers Act of 2024—added new Code Section 174A to the Internal Revenue Code. This critical legislation restored the ability of taxpayers to fully expense domestic R&E expenditures in the year they are incurred, effective for tax years beginning after December 31, 2024.

The OBBBA introduces significant flexibility but requires careful strategic modeling. Under the new law, taxpayers face several critical accounting method decisions. Going forward, they may choose to immediately deduct domestic R&E costs under Section 174A, or they may affirmatively elect to capitalize and amortize them over a period of not less than 60 months, beginning with the month in which the taxpayer first realizes benefits from the expenditures.

For taxpayers burdened with prior unamortized amounts accumulated during the TCJA era (2022-2024), the OBBBA provides three distinct recovery options: deduct the entire unamortized amount fully in 2025, deduct the unamortized amount ratably over a two-year period (2025 and 2026), or continue to amortize the costs over the remainder of the original five-year period.

Furthermore, the law includes a highly beneficial retroactive provision for eligible small businesses. Taxpayers meeting the $31 million gross receipts test are permitted to retroactively apply Section 174A expensing to their 2022-2024 expenditures. This election must be made by July 6, 2026, and requires the filing of amended returns or administrative adjustment requests (AARs). Throughout all these changes, foreign R&E expenditures remain subject to the punitive 15-year amortization schedule. This bifurcated treatment reflects a deliberate, continued federal policy focus on incentivizing U.S.-based research and development activity, heavily favoring domestic innovation hubs like Tacoma.

Manufacturing Machinery and Equipment (M&E) Exemption: Under RCW 82.08.02565, manufacturers and processors for hire who perform R&D are exempt from retail sales and use tax on machinery and equipment used directly in a manufacturing or R&D operation. Historically, the Washington DOR interpreted this statute narrowly, insisting that a taxpayer must physically “manufacture items for sale” to qualify for the exemption.

However, in the landmark case Terrapower LLC v. Dep’t of Revenue (BTA Docket No. 19-065, 2022), the Washington State Board of Tax Appeals dismantled this narrow interpretation. The Board ruled that a manufacturer engaged in an R&D operation does not need to manufacture items for commercial sale to qualify for the M&E exemption from sales tax. The DOR officially accepted this ruling and declined to appeal, issuing a Special Notice confirming the expanded scope. This decision is a massive windfall for pure research facilities, testing laboratories, and prototyping centers in Tacoma, allowing them to acquire multi-million dollar capital equipment—such as electron microscopes, hydraulic presses, and 5G network nodes—entirely free of Washington’s high sales and use taxes.

Clean Technology Investment Deferrals: Washington provides robust sales and use tax deferral programs for eligible investment projects in clean technology with costs of at least $2 million. This deferral covers the manufacturing of zero-emission passenger cars, commercial vehicles, motorcycles, and crucially for Tacoma, electric marine propulsion systems and marine battery infrastructure. While deferred taxes typically must be repaid in ten equal annual installments starting the second year after project completion, deferral recipients may receive a 50%, 75%, or 100% reduction in the repayment of these state sales and use taxes if they meet specific labor standards, such as utilizing community workforce agreements or procuring from women, minority, or veteran-owned businesses. This effectively converts the deferral into a complete tax exemption for qualifying clean tech R&D and manufacturing facilities.

City of Tacoma Municipal B&O Job Credit: In addition to the state-level CEZ credit, the City of Tacoma municipal code provides a localized B&O Job Credit. Employers expanding their workforce anywhere in Tacoma receive a $500 municipal B&O tax credit annually for five consecutive years for each new full-time position created, provided they pay that employee a family wage and maintain the position for the full five-year period.

This base municipal credit contains strategic multipliers. The credit increases to $1,000 annually if the new position is filled by an individual who meets the vocational rehabilitation referral qualifications for the federal Work Opportunity Tax Credit (WOTC). Furthermore, the city provides an additional $250 annual bonus credit if the business performs international services (such as computer software engineering, business consulting, or engineering that reaches outside the country’s borders) and the job is located within the Tacoma CEZ. Consequently, an R&D firm expanding operations in Tacoma’s CEZ could secure up to $2,250 annually in municipal B&O tax credits per employee, operating in direct synergy with the $4,000 state-level CEZ credit.

At the state and local levels, the multiplicity of B&O tax classifications, the necessity of tracking the exact geographic location of employees for CEZ credits, and the strict statutory deadlines for Annual Tax Performance Reports require deeply integrated payroll and tax accounting software systems. Failure to file the requisite state surveys mathematically results in harsh clawbacks of otherwise valid state credits, demonstrating that administrative precision is just as critical as technological innovation when operating within Washington’s tax framework.